10-Q 1 d10q.txt FOR PERIOD ENDING 3/31/2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ______ to ______. Commission file number 1-10570 BJ SERVICES COMPANY (Exact name of registrant as specified in its charter) Delaware 63-0084140 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5500 Northwest Central Drive, Houston, Texas 77092 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including areacode: (713) 462-4239 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO _____ ----- There were 82,274,048 shares of the registrant's common stock, $.10 par value, outstanding as of May 10, 2001. -------------------------------------------------------------------------------- ================================================================================ BJ SERVICES COMPANY INDEX PART I - FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Condensed Statement of Operations (Unaudited) - Three and six months ended March 31, 2001 and 2000 3 Consolidated Condensed Statement of Financial Position - March 31, 2001 (Unaudited) and September 30, 2000 4 Consolidated Statement of Stockholders' Equity (Unaudited) - Six months ended March 31, 2001 5 Consolidated Condensed Statement of Cash Flows (Unaudited) - Six months ended March 31, 2001 and 2000 6 Notes to Unaudited Consolidated Condensed Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 PART II - OTHER INFORMATION 20 2 PART I FINANCIAL INFORMATION Item 1. Financial Statements BJ SERVICES COMPANY CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) (In thousands, except per share amounts)
Three Months Ended Six Months Ended March 31 March 31, 2001 2000 2001 2000 ---------- ---------- ------------ ----------- Revenue $549,661 $390,755 $1,039,339 $ 745,575 Operating expenses: Cost of sales and services 377,743 302,997 725,062 584,449 Research and engineering 8,877 7,241 16,770 13,284 Marketing 15,638 13,411 29,769 26,147 General and administrative 16,903 13,862 32,803 27,560 Goodwill amortization 3,375 3,368 6,749 6,737 ---------- ---------- ------------ ----------- Total operating expenses 422,536 340,879 811,153 658,177 ---------- ---------- ------------ ----------- Operating income 127,125 49,876 228,186 87,398 Interest expense (3,773) (5,015) (7,817) (11,984) Interest income 470 163 873 249 Other income (expense) - net (1,471) (861) (2,735) (1,410) ---------- ---------- ------------ ----------- Income before income taxes 122,351 44,163 218,507 74,253 Income tax expense 41,599 14,839 74,292 24,467 ---------- ---------- ------------ ----------- Net income $ 80,752 $ 29,324 $ 144,215 $ 49,786 ========== ======== ========== ========== Earnings per share: Basic $ .98 $ .38 $ 1.76 $ .66 Diluted $ .96 $ .34 $ 1.72 $ .60 Weighted average shares outstanding: Basic 82,039 76,717 82,044 75,699 Diluted 83,819 84,933 83,871 83,226 Proforma earnings per share (See Note 2): Basic $ $.49 $ .19 $ .88 $ .33 Diluted $ $.48 $ .17 $ .86 $ .30 Proforma weighted average shares outstanding (See Note 2): Basic 164,078 153,434 164,088 151,398 Diluted 167,638 169,866 167,742 166,452
See Notes to Unaudited Consolidated Condensed Financial Statements 3 BJ SERVICES COMPANY CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION (In thousands) March 31, September 30, 2001 2000 ---------- ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 8,376 $ 6,472 Receivables - net 445,911 348,106 Inventories: Product 64,326 57,988 Work-in-process 2,647 1,408 Parts 61,819 53,399 ---------- ---------- Total inventories 128,792 112,795 Deferred income taxes 14,032 15,632 Other current assets 26,826 23,373 ---------- ---------- Total current assets 623,937 506,378 Property - net 608,941 585,394 Deferred income taxes 142,345 199,795 Goodwill - net 482,823 476,237 Other assets 15,588 17,429 ---------- ---------- $1,873,634 $1,785,233 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable 167,941 $ 147,581 Short-term borrowings and current portion of long-term debt 34,829 34,100 Accrued employee compensation and benefits 47,935 48,536 Income and other taxes 23,518 22,771 Accrued insurance 12,461 11,557 Other accrued liabilities 69,887 72,546 ---------- ---------- Total current liabilities 356,571 337,091 Long-term debt 126,631 141,981 Deferred income taxes 9,524 7,966 Other long-term liabilities 128,242 128,424 Stockholders' equity 1,252,666 1,169,771 ---------- ---------- $1,873,634 $1,785,233 ========== ========== See Notes to Unaudited Consolidated Condensed Financial Statements 4 BJ SERVICES COMPANY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
Accumulated Capital Other Common In Excess Treasury Unearned Retained Comprehensive Stock Of Par Stock Compensation Earnings Income Total ------- ---------- ---------- ------------- --------- ------------- ------- (in thousands) Balance, September 30, 2000 $ 8,688 $ 948,859 $ (165,154) $ (3,433) $ 376,270 $ 4,541 $ 1,169,771 Comprehensive income: Net income 144,215 Other comprehensive income, net of tax: Cumulative translation adjustments (597) Comprehensive income 143,618 Reissuance of treasury stock for: Stock options 33,991 (22,204) 11,787 Stock purchase plan 8,052 (2,727) 5,325 Stock performance awards (1,814) 1,397 419 2 Acquisition 267 171 438 Treasury stock purchased (81,019) (81,019) Recognition of unearned compensation 2,744 2,744 Revaluation of stock performance awards 677 (677) Stock performance grant 4,141 (4,141) ------- --------- ---------- --------- --------- ------- ----------- Balance, March 31, 2001 $ 8,688 $ 951,863 $ (202,466) $ (5,507) $ 496,144 $ 3,944 $ 1,252,666 ======= ========= ========== ========= ========= ======= ===========
See Notes to Unaudited Consolidated Condensed Financial Statements 5 BJ SERVICES COMPANY CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED) (In thousands)
Six Months Ended March 31, 2001 2000 -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $144,215 $ 49,786 Adjustments to reconcile net income to cash provided by operating activities: Minority interest 3,055 1,593 Amortization of unearned compensation 2,744 2,190 Depreciation and amortization 51,493 51,784 Deferred income taxes 59,299 16,148 Changes in: Receivables (94,379) (42,471) Inventories (15,510) (9,476) Accounts payable 19,966 12,880 Other current assets and liabilities (6,131) (25,590) Other - net 2,974 (7,629) -------- --------- Net cash provided by operating activities 167,726 49,215 CASH FLOWS FROM INVESTING ACTIVITIES: Property additions (74,809) (32,589) Proceeds from disposal of assets 7,718 123,308 Acquisition of business, net of cash acquired (10,996) -------- --------- Net cash provided by (used for) investing activities (78,087) 90,719 CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of borrowings - net (23,830) (325,489) Proceeds from issuance of stock 17,114 187,211 Purchase of treasury stock (81,019) -------- --------- Net cash used for financing activities (87,735) (138,278) Increase in cash and cash equivalents 1,904 1,656 Cash and cash equivalents at beginning of period 6,472 3,924 -------- --------- Cash and cash equivalents at end of period $ 8,376 $ 5,580 ======== =========
See Notes to Unaudited Consolidated Condensed Financial Statements 6 BJ SERVICES COMPANY NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Note 1 General In the opinion of management, the unaudited consolidated condensed financial statements for BJ Services Company (the "Company") include all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial position and statement of stockholders' equity as of March 31, 2001, and the results of operations for each of the three-month and six-month periods ended March 31, 2001 and 2000 and cash flows for each of the six-month periods ended March 31, 2001 and 2000. The consolidated condensed statement of financial position at September 30, 2000 is derived from the September 30, 2000 audited consolidated financial statements. Although management believes the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations and the cash flows for the six-month period ended March 31, 2001 are not necessarily indicative of the results to be expected for the full year. Certain amounts for fiscal 2000 have been reclassified to conform to the current year presentation. Note 2 Earnings Per Share Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is based on the weighted-average number of shares outstanding during each period and the assumed exercise of dilutive stock options and warrants less the number of treasury shares assumed to be purchased with the exercise proceeds using the average market price of the Company's common stock for each of the periods presented. 7 The following table presents information necessary to calculate earnings per share for the periods presented (in thousands except per share amounts):
Three Months Ended Six Months Ended March 31, March 31, 2001 2000 2001 2000 ------- ------- -------- -------- Net income $80,752 $29,324 $144,215 $ 49,786 Weighted-average common shares outstanding 82,039 76,717 82,044 75,699 ------- ------- -------- -------- Basic earnings per share $ .98 $ .38 $ 1.76 $ .66 ======= ======= ======== ======== Weighted-average common and dilutive potential common shares outstanding: Weighted-average common shares outstanding 82,039 76,717 82,044 75,699 Assumed exercise of stock options 1,780 2,054 1,827 1,854 Assumed exercise of warrants 6,162 5,673 ------- ------- -------- -------- 83,819 84,933 83,871 83,226 ------- ------- -------- -------- Diluted earnings per share $ .96 $ .34 $ 1.72 $ .60 ======= ======= ======== ========
At a special meeting of stockholders on May 10, 2001, the Company's stockholders approved an amendment to the Company's charter increasing the number of authorized shares of common stock from 160 million to 380 million shares. As a result, a 2 for 1 stock split approved by the Board of Directors on March 22, 2001 (to be effected in the form of a stock dividend) will be distributed on or about May 31, 2001 to stockholders of record as of May 17, 2001. Accordingly, proforma information is provided in the financial statements for all periods presented for shares outstanding and earnings per share amounts to reflect the increased number of common shares to be outstanding resulting from the stock split. Note 3 Segment Information The Company has three business segments: U.S./Mexico Pressure Pumping, International Pressure Pumping and Other Oilfield Services. The U.S./Mexico Pressure Pumping Services segment includes cementing services and stimulation services (consisting of fracturing, acidizing, sand control, nitrogen, coiled tubing and downhole tools services) that are provided throughout the United States and Mexico. The International Pressure Pumping Services segment also includes cementing and stimulation services provided in over 40 countries in the major oil and natural gas producing areas of Latin America, Europe, Africa, Southeast Asia, Canada and the Middle East. The Other Oilfield Services segment consists of specialty chemicals, tubular services and process and pipeline services provided in the U.S. and internationally. 8 The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Company's annual financial statement footnotes. The Company evaluates the performance of its operating segments based on operating income excluding goodwill amortization and unusual charges. Intersegment sales and transfers are not significant. Summarized financial information concerning the Company's segments is shown in the following table. The "Corporate" column includes corporate general and administrative expenses and goodwill amortization. Business Segments
U.S./Mexico International Other Pressure Pressure Oilfield Pumping Pumping Services Corporate Total ------------------ ------------------ ------------- --------------- ---------------- (in thousands) Three months ended March 31, 2001 Revenues $290,964 $211,410 $ 46,839 $ 448 $ 549,661 Operating income (loss) 95,649 40,153 6,001 (14,678) 127,125 Three months ended March 31, 2000 Revenues $173,913 $176,741 $ 39,947 $ 154 $ 390,755 Operating income (loss) 28,261 31,861 271 (10,517) 49,876 Six months ended March 31, 2001 Revenues $544,878 $399,173 $ 94,748 $ 540 $1,039,339 Operating income (loss) 171,561 68,812 12,205 (24,392) 228,186 Identifiable assets 432,955 623,972 119,872 696,835 1,873,634 Six months ended March 31, 2000 Revenues $340,501 $322,151 $ 82,593 $ 330 $ 745,575 Operating income (loss) 57,389 45,475 4,322 (19,788) 87,398 Identifiable assets 327,673 608,250 112,202 748,668 1,796,793
Three Months Ended Six Months Ended March 31, March 31, --------------------------------- ------------------------------------ 2001 2000 2001 2000 ------------- --------------- --------------- ---------------- Total operating profit for reportable segments $127,125 $49,876 $228,186 $ 87,398 Interest income (expense) - net (3,303) (4,852) (6,944) (11,735) Other income (expense) - net (1,471) (861) (2,735) (1,410) -------- ------- -------- -------- Income before income taxes $122,351 $44,163 $218,507 $ 74,253 ======== ======= ======== ========
9 Note 4 Comprehensive Income The components of comprehensive net income, net of tax, are as follows in thousands:
Three Months Ended Six Months Ended March 31, March 31, 2001 2000 2001 2000 ------- ------- -------- ------- Net income attributable to common stockholders $80,752 $29,324 $144,215 $49,786 Change in cumulative translation adjustment (699) (302) (597) (627) ------- ------- -------- ------- Comprehensive net income $80,053 $29,022 $143,618 $49,159 ======= ======= ======== =======
Note 5 New Accounting Standards Effective October 1, 2000, the Company adopted Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities. This statement requires recognition of all derivatives as either assets or liabilities in the statement of financial position and their measurement at fair value. The adoption of SFAS 133 did not have a material impact on the Company's financial position or results of operations. Note 6 Business Acquisition In February 2001, the Company completed the acquisition of Preeminent Energy Services ("Preeminent") for a total purchase price of $21.4 million (including transaction costs) in cash and Company common stock. The transaction may be summarized as follows: Cash paid $11,614 Stock issued 438 Debt assumed 9,311 ------- Total purchase price 21,363 Fair Value of Net Assets Acquired 8,026 ------- Goodwill $13,337 ======= This acquisition was accounted for using the purchase method of accounting. Accordingly, the results of Preeminent's operations are included in the consolidated condensed statement of operations beginning February 1, 2001. The assets and liabilities of Preeminent have been recorded in the Company's consolidated condensed statement of financial position at estimated fair market value as of February 1, 2001 with the remaining purchase price reflected as goodwill, which is being amortized on a straight-line basis over 40 years. The allocation of the purchase price is preliminary, as valuation and other studies have not been finalized. It is not expected that the final allocation of purchase price will produce materially different results from those presented herein. Proforma 10 financial information is not presented as the Company's management does not believe that this acquisition is material to the Company's consolidated financial statements. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company's operations are primarily driven by the number of oil and natural gas wells being drilled, the depth and drilling conditions of such wells, the number of well completions and the level of workover activity worldwide. Drilling activity, in turn, is largely dependent on the price of oil and natural gas. This situation often leads to volatility in the Company's revenues and profitability, especially in the United States and Canada, where the Company historically has generated in excess of 50% of its revenues. Due to "aging" oilfields and lower-cost sources of oil internationally, drilling activity in the United States has declined more than 75% from its peak in 1981. Record low drilling activity levels were experienced in 1986, 1992 and again in early 1999. Despite a recovery in the latter half of fiscal 1999, the U.S. average fiscal 1999 active rig count represented the lowest in history. The recovery in U.S. drilling continued throughout fiscal 2000 and into fiscal 2001 due to exceptionally strong oil and natural gas prices. For the six-month period ended March 31, 2001, the active U.S. rig count averaged 1,106 rigs, a 43% increase over the same period in fiscal 2000. For the three-month period ended March 31, 2001, the active U.S. rig count averaged 1,139 rigs, which is the highest average quarterly U.S. rig count since 1986. Drilling activity outside North America has historically been less volatile than domestic drilling activity and the downturn and recovery cycles tend to lag those of North America. While Canadian drilling activity began to recover during the latter part of fiscal 1999, activity in most of the other international regions has only recently begun to recover from the 1999 record lows. The recovery in Canadian drilling activity continued into fiscal 2001 with active rigs averaging 445 rigs during the six-month period ending March 31, 2001, a 9% increase over the same period of the previous fiscal year. For the quarter ended March 31, 2001, Canadian drilling activity averaged 515 rigs, 7.4% higher than the same period of the prior year. Active international drilling rigs (excluding Canada) averaged 717 rigs during the six-month period ended March 31, 2001, a 25% increase over the comparable period of fiscal 2000. For the three-month period ended March 31, 2001, international drilling rigs (excluding Canada) averaged 724 rigs, a 26% increase over the same period of fiscal 2000. 12 Results of Operations The following table sets forth selected key operating statistics reflecting industry rig counts and the Company's financial results:
Three Months Ended Six Months Ended March 31, March 31, 2001 2000 2001 2000 --------- ----------- ----------- ------------- Rig Count: (1) U.S. 1,139 770 1,106 772 International 1,239 1,056 1,162 982 Revenue per rig (in thousands) $231.1 $214.0 $458.2 $425.1 Revenue per employee (in thousands) $ 56.1 $ 46.7 $108.2 $ 91.3 Percentage of gross profit to revenue (2) 31.3% 22.5% 30.2% 21.6% Percentage of research and engineering expense to revenue 1.6% 1.9% 1.6% 1.8% Percentage of marketing expense to revenue 2.8% 3.4% 2.9% 3.5% Percentage of general and administrative expense to revenue 3.1% 3.5% 3.2% 3.7%
(1) Industry estimate of drilling activity as measured by average active rigs. (2) Gross profit represents revenue less cost of sales and services. Revenue: The Company's revenue for the quarter ended March 31, 2001 was $549.7 million, an increase of 41% from the previous year's second fiscal quarter and the highest quarterly revenue in the Company's history. For the six- month period ended March 31, 2001, the Company's revenue was $1.0 billion, an increase of 39% from the same period of fiscal 2000. These record results were attributable to continued improvements in U.S. drilling activity and pricing, and gradually increasing international drilling activity. Management expects the Company to continue to achieve revenue improvement in each of the remaining quarters of fiscal 2001 compared with the same quarters of the previous year. Operating Income: For the quarter ended March 31, 2001, the Company's operating income was $127.1 million, compared to operating income of $49.9 million in the second quarter of fiscal 2000. For the six months ended March 31, 2001, the Company recorded operating income of $228.2 million compared to $87.4 million in the first half of fiscal 2000. The Company's gross profit margins for the quarter increased to 31.3% from 22.5% in the prior year's second fiscal quarter. For the six months ended March 31, 2001, the Company's gross profit margins increased to 30.2% from 21.6% for the same period of fiscal 2000. The margin improvements were primarily a result of improved U.S. pricing, better equipment utilization, and labor efficiencies and more than offset a $2.6 million impairment write-down of idle operating assets identified for disposal. These efficiencies are reflected in the increase in both revenue per rig and revenue per employee during the first six months of fiscal 2001 compared to the same period of fiscal 2000. Partially offsetting the 13 improved margins were increases in research and engineering, marketing and general and administrative expenses which increased by $6.9 million and $12.4 million compared with the prior year's second quarter and six-month period, respectively, due primarily to higher accruals for incentive plans, which are based upon the Company's earnings and stock price. Each of these operating expenses, however, declined as a percentage of revenue for both the three and six-month periods. Other: Interest expense decreased by $1.2 million and $4.2 million, respectively, compared with the same three and six-month periods of the previous year due to lower outstanding debt. This was a result of the application of improved free cash flow from operations. The proceeds of the exercise of warrants reduced outstanding debt in the previous fiscal year. Borrowings and interest expense are expected to continue to decrease in 2001 because of expected continued strong cash flow from operations. Income Taxes: The Company's effective tax rate for the six-month period ended March 31, 2001 increased to 34% from 33% in the same period of last year primarily as a result of increased profitability in the higher tax jurisdictions of North America. U.S./Mexico Pressure Pumping Segment The Company's U.S./Mexico pressure pumping revenues for the three and six- month periods ended March 31, 2001increased by 67% and 60%, respectively, from the same prior year periods. Each of the Company's major U.S. service lines, including cementing, stimulation, coiled tubing and downhole tools, showed revenue increases, and all U.S. operating regions realized revenue increases in excess of 50% compared with the prior year's second quarter. These increases are primarily due to increased drilling activity and improved pricing. U.S. drilling activity for the quarter ended March 31, 2001 increased by 48% over the same quarter of fiscal 2000, to an average of 1,139 active rigs (79% of which were drilling for natural gas) during the quarter. This represents the highest average quarterly rig count since 1986. For the six months ended March 31, 2001, the U.S. active rig count averaged 1,106, a 43% increase over the same period of the previous fiscal year. U.S. workover activity levels also increased, up 16% during the first six months of fiscal 2001 compared to the same period of fiscal 2000. The stronger activity levels also allowed the Company to capture most of its September 2000 and a portion of its March 2001 price book increases. Also during the quarter, the Company completed the acquisition of Preeminent Energy Services, a Louisiana based coiled tubing company, which strengthened the Company's existing Gulf Coast and South Texas capabilities. As a result of the price improvement and the expected continuation of strong drilling and workover activity levels, management believes that revenues generated by its U.S./Mexico pressure pumping operations during the remaining two quarters of fiscal 2001 will continue to substantially exceed those in the comparable periods of fiscal 2000. Operating income for the Company's U.S./Mexico pressure pumping operations was $95.6 million in the second quarter of fiscal 2001 compared to $28.3 million in the same period of fiscal 2000. For the six-month period ended March 31, 2001, U.S./Mexico pressure pumping operating income was $171.6 million, compared to $57.4 million during the same year earlier 14 period. The improvements were due primarily to improved pricing, better equipment utilization, and labor efficiencies. On a year-over-year basis, pricing improved approximately 24% as a result of price book increases implemented during September 2000 and March 2001. On a sequential basis, pricing improved approximately 6% from the previous quarter. International Pressure Pumping Segment Revenue for the Company's international pressure pumping operations for the quarter and six-month periods ended March 31, 2001 increased 20% and 24%, respectively, compared with the same periods of the previous fiscal year. These were due primarily to an increase in Canadian gas drilling, increased stimulation activity in several international regions and contributions from geographic expansions. For the quarter ended March 31, 2001, each of the Company's international regions except Europe/Africa showed year-over-year revenue increases, with its Russia/China region up 57%, Asia Pacific region up 30%, Latin America region up 43%, Middle East region up 46%, and Canada region up 11%. While the Europe/Africa region recorded a 6% decline in revenue, this was solely due to an abnormally slow quarter for North Sea vessel stimulation work caused by project delays. For the six-month period ended March 31, 2001, all of the Company's international regions showed year-over-year revenue increases. As a result of new contracts and improving activity in selected locations, management expects revenue increases for each of its international regions throughout the remainder of fiscal 2001 when compared to the same quarter of fiscal 2000. As a result of the improved activity, operating income for the Company's international pressure pumping operations was $40.2 million in the second quarter of fiscal 2001 compared to $31.9 million in the same quarter of fiscal 2000. For the six months ended March 31, 2001, operating income was $68.8 million, an increase of $23.3 million over the same period of fiscal 2000. In addition to the improved activity, operating margins improved slightly due to startup costs in selected international locations that negatively impacted operating margins in the first six months of the previous year. Other Services Segment Revenue for the Company's other service lines, which consist of specialty chemicals, tubular services and process and pipeline services, increased 17% in the second quarter of fiscal 2001 compared to the same period of the prior year due primarily to increased activity from the process and pipeline inspection service line in Canada and Europe. For the six months ended March 31, 2001, revenue for these combined service lines increased 15% over the same period of fiscal 2000 due primarily to geographic expansions. Operating income for these service lines was $6.0 million (12.8% of revenue) in the three-month period ended March 31, 2001 compared to $.3 million (.7% of revenue) in the same period of fiscal 2000. For the six-month period ended March 31, 2001, operating income for the Company's other service lines was $12.2 million, an increase of $7.9 million over the same period of fiscal 2000. Operating income margins in the Company's tubular service and process and pipeline service lines benefited most from the increased revenue as they were better able to cover their relatively high 15 fixed cost base. Also contributing to the percentage increase in margins was the impact of startup costs incurred during the first half of fiscal 2000 for new projects in the process and pipeline services group that were delayed until the prior year's third fiscal quarter. Capital Resources and Liquidity ------------------------------- Net cash provided from operating activities for the first half of fiscal 2001 was $167.7 million, an increase of $118.5 million from the comparable period of the prior year, due primarily to higher profitability and non-cash U.S. tax expense due to loss carryforwards. This was partially offset by increases in working capital, particularly accounts receivable and inventories, caused by the rapid revenue growth in North America. Net cash used for investing activities in the first six months of fiscal 2001 was $78.1 million, compared to net cash of $90.7 million provided by investing activities in the comparable period of 2000. The prior year's net cash provided by investing activities was due primarily to proceeds received from a transaction involving the transfer of certain pumping service equipment assets in the first quarter of fiscal 2000. Subsequent to the transfer of equipment, the Company received $120.0 million that was used to repay outstanding bank debt. Excluding this prior year transaction, net cash used for 2001 investing activities increased by $48.8 million due mostly to increased capital spending and the acquisition of Preeminent Energy Services in February 2001 for net cash of $11.0 million. Projected capital expenditures for fiscal 2001 are expected to increase significantly from 2000 and are currently planned to be approximately $150 - 165 million. The 2001 capital program will primarily replace and enhance U.S. fracturing equipment and expand stimulation resources internationally. The actual amount of 2001 capital expenditures will be dependent upon the availability of external manufacturing capacity and is expected to be funded by cash flows from operating activities and available credit facilities. Management believes cash flows from operating activities and available lines of credit, if necessary, will be sufficient to fund projected capital expenditures. Cash flows used for financing activities for the six months ended March 31, 2001, were $87.7 million compared to $138.3 million in the comparable period of fiscal 2000. Financing activities in the first half of fiscal 2000 included a private placement of 4.0 million shares of common stock in October 1999 that generated proceeds of $144.0 million used to pay down outstanding debt. During the first six months of fiscal 2001, the Company purchased 1.4 million shares of its common stock at a cost of $81.0 million. Management strives to maintain low cash balances while utilizing available credit facilities to meet the Company's capital needs. Any excess cash generated has historically been used to pay down outstanding borrowings or fund the Company's stock repurchase program. The Company has a committed, unsecured bank credit facility (the "Bank Credit Facility") consisting of a six-year term loan of approximately $30.3 million (currently drawn in Canadian dollars under a provision which is renewable annually at the option of the banks), which is repayable in 22 quarterly installments that began in March 1997, and a five year U.S. $225.0 million revolving facility available through June 2001. Presently, the Company is in negotiations to replace the revolving credit facility. 16 Management expects, subject to final negotiations and the execution of a definitive credit agreement, to have a committed facility in place prior to the expiration of the existing credit facility at June 30, 2001. At March 31, 2001, borrowings outstanding under the Bank Credit Facility totaled $30.3 million, consisting solely of borrowings under the term loan. Principal reductions of term loans under the Bank Credit Facility are due in aggregate annual installments of $14.5 million and $15.8 million in the years ending September 30, 2001 and 2002, respectively. In addition to the committed facility, the Company had $146.7 million in various unsecured, discretionary lines of credit at March 31, 2001, which expire at various dates in 2001. There are no requirements for commitment fees or compensating balances in connection with these lines of credit. Interest on borrowings is based on prevailing market rates. At March 31, 2001, there was $6.5 million in outstanding borrowings under these lines of credit. Because of improved free cash flows from operations and despite the repurchase of the Company's common stock during the first quarter of fiscal 2001, the Company's total interest-bearing debt decreased to 11.4% of its total capitalization at March 31, 2001, compared to 13.1% at September 30, 2000. The Bank Credit Facility includes various customary covenants and other provisions including the maintenance of certain profitability and solvency ratios and restrictions on dividend payments under certain circumstances, none of which materially restrict the Company's activities. Management believes that the Bank Credit Facility, combined with other discretionary credit facilities and cash flows from operations, provides the Company with sufficient capital resources and liquidity to manage its routine operations, meet debt service obligations and fund projected capital expenditures. If the discretionary lines of credit are not renewed, or if borrowings under these lines of credit otherwise become unavailable, the Company expects to refinance this debt by arranging additional committed bank facilities or through other long-term borrowing alternatives. Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. This statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The adoption of SFAS 133 at the beginning of fiscal year 2001 did not have a material impact on the Company's financial position or results of operations. Forward Looking Statements This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934 concerning, among other things, the Company's prospects, expected revenues, expenses and profits, developments and business strategies for its operations all of which are subject to certain risks, uncertainties and assumptions. These forward-looking statements are identified by their use of terms 17 and phrases such as "expect," "estimate," "project," "believe," "achievable" and similar terms and phrases. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate under the circumstances. Such statements are subject to general economic and business conditions, conditions in the oil and natural gas industry, weather conditions that affect conditions in the oil and natural gas industry, the business opportunities that may be presented to and pursued by the Company, changes in law or regulations and other factors, many of which are beyond the control of the Company. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those expected, estimated or projected. 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The table below provides information about the Company's market sensitive financial instruments and constitutes a "forward-looking statement." The Company's major market risk exposure is changing interest rates, primarily in the United States and Canada. The Company's policy is to manage interest rates through use of a combination of fixed and floating rate debt. A portion of the Company's borrowings are denominated in foreign currencies which exposes the Company to market risk associated with exchange rate movements. When necessary, the Company enters into forward foreign exchange contracts to hedge the impact of foreign currency fluctuations. There was one foreign exchange contract outstanding at March 31, 2001 in the amount of $41.9 million. This contract was settled on April 2, 2001 with no gain or loss. All items described are non- trading and are stated in U.S. dollars.
Expected Maturity Dates Fair Value 2000 2001 2002 2003 Thereafter Total March 31, 2001 ---- ---- ---- ---- ---------- ----- -------------- (in thousands) SHORT TERM BORROWINGS Bank borrowings; US$ denominated $ 548 $ 548 $ 548 Average variable interest rate - 6.04% at March 31, 2001 Bank borrowings: Canadian $ denominated $ 2,114 $ 2,114 $ 2,114 Average variable interest rate - 6.75% at March 31, 2001 Bank borrowings; Deutsche mark $ 2,720 $ 2,720 $ 2,720 denominated Average variable interest rate - 5.16% at March 31, 2001 LONG TERM BORROWINGS Current term loan; Canadian $ denominated $ 14,563 14,563 $ 29,126 $ 29,126 Variable interest rate - 5.36% at March 31, 2001 Current Leases: US $ denominated $ 321 $ 321 $ 321 Variable interest rate - 6.18% at March 31, 2001 Non-current term loan; Canadian $ $ 1,214 $ 1,214 $ 1,214 denominated Variable interest rate - 5.36% at March 31, 2001 Non-current leases; US $ denominated $ 435 350 $ 785 $ 785 Variable interest rate - 6.18% at March 31, 2001 7% Series B Notes - US$ denominated $124,632 $ 124,632 $ 127,100 Fixed interest rate - 7%
19 PART II OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities On March 22, 2001, the Board of Directors of BJ Services Company (the "Company") approved an amendment to the Company's Amended Certificate of Incorporation to increase the number of shares of authorized common stock of the Company, par value $0.10 per share (the "Common Stock"), from 160,000,000 shares to 380,000,000 shares (the "Charter Amendment"). The Charter Amendment was approved by the Company's stockholders at a special meeting of stockholders held on May 10, 2001. On March 22, 2001, the Board of Directors of the Company declared a stock split, which will be effected in the form of a stock dividend (the "Stock Split") on the issued shares of Common Stock. The dividend will be paid on or about May 31, 2001, in newly issued shares to stockholders of record on May 17, 2001. Stockholders of record as of the close of business on May 17, 2001, the record date for the stock split (the "Stock Split Record Date"), will receive one additional share of Common Stock for each share of Common Stock held by such stockholder on the Stock Split Record Date. After giving effect to the Stock Split, the Company's preferred share purchase rights associated with the Common Stock (the "Rights"), and certain liquidation, dividend and voting rights associated with the Company's authorized but unissued Series A Junior Participating Preferred Stock issuable upon distribution and exercise of the Rights (the "Preferred Stock") will be proportionately adjusted to reflect the effect of the Stock Split. After giving effect to such adjustments to the Rights, the number of Rights associated with each share of Common Stock has been adjusted to be one-quarter of a Right to purchase a one one- thousandth interest in a share of the Company's authorized Preferred Stock. The Rights are subject to further adjustments pursuant to their terms under certain circumstances. Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Stockholders on January 25, 2001 in Houston, Texas. All nominated directors were elected, and the BJ Services Company 2000 Incentive Plan was approved. 20 (i) Directors elected at the Annual Meeting: Votes in Votes Favor Withheld ----- -------- Class II Directors ------------------ Don D. Jordan 74,593,495 240,624 Michael McShane 74,599,969 234,150 Directors with terms of office continuing after the Annual Meeting: Class I Directors ----------------- John R. Huff R.A. LeBlanc Michael E. Patrick Class III Directors ------------------- L. William Heiligbrodt James L. Payne J.W. Stewart Votes in Votes (ii) Favor Withheld ----- --------- Adoption of the BJ Services Company 2000 Stock Incentive Plan 53,217,181 21,616,936 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. *3.5 Certificate of Amendment to Certificate of Incorporation, dated May 10, 2001. *10.28 Director's Benefit Plan effective December 7, 2000. *10.29 BJ Services Deferred Compensation Plan effective October 1, 2000 * Filed herewith 21 10.30 Amendment effective May 10, 2001 to BJ Services Company 1995 Incentive Plan (filed as Appendix B to the Company's Proxy Statement dated April 10, 2001 and incorporated herein by reference.) 10.31 Amendment effective May 10, 2001 to BJ Services Company 1997 Incentive Plan (filed as Appendix C to the Company's Proxy Statement dated April 10, 2001 and incorporated herein by reference.) 10.32 Second Amendment effective May 10, 2001 to BJ Services Company 2000 Incentive Plan (filed as Appendix D to the Company's Proxy Statement dated April 10, 2001 and incorporated herein by reference.) (b) Reports on Form 8-K. None 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BJ Services Company (Registrant) Date: May 15, 2001 BY\s\Michael McShane ----------------------------------------- Michael McShane Senior Vice President, Finance, Chief Financial Officer and Director (Principal Financial Officer) Date: May 15, 2001 BY\s\James Horsch ----------------------------------------- James Horsch Controller (Principal Accounting Officer) 23